Buying a franchise: how to review a non-disclosure agreement

Before you join a franchise network, the brand may only provide detailed information once you have signed a non-disclosure agreement, also known as an NDA. Protecting information that is not publicly available is understandable. However, the agreement should not prevent you from assessing the offer or quietly introduce other business commitments. Before signing, establish what it protects, who you may share the documents with and what happens if you ultimately decide not to buy the franchise.

What Czech law protects even without an agreement

The Czech Republic has no specific franchise legislation, mandatory registration of franchise agreements or statutory disclosure document for prospective franchisees. A franchise agreement is usually an innominate contract — one that does not fall within a specifically defined statutory category — under Section 1746(2) of Act No. 89/2012 Coll., the Civil Code. Negotiations before signing are governed by general civil law rules, including pre-contractual disclosure obligations.

Confidential information is not left unprotected simply because you have not signed a separate agreement. Under Section 1730(2) of the Civil Code, a party that obtains confidential information or communications about the other party during negotiations must ensure that they are not misused or disclosed without lawful grounds. If a party gains a benefit by breaching this duty, it must surrender that benefit.

Some information may also qualify as a trade secret under Section 504 of the Civil Code. However, not every brand presentation automatically constitutes a trade secret. What matters is whether the statutory criteria are met, not merely whether a document is stamped ‘confidential’.

An NDA should clarify the protection provided, not replace the information you need to make a decision. Signing it does not confirm the accuracy of the figures supplied or the quality of the franchise concept on offer.

Define the information, purpose and exceptions

Start by reading the definition of confidential information. It may cover financial information, operating procedures, draft agreements or non-public supplier lists. A vague definition that treats absolutely everything ever connected with the brand as confidential, regardless of its source or how it was obtained, is problematic.

Ask for wording that makes it clear which materials are covered. For information disclosed orally, you can agree that its confidential status must subsequently be confirmed in writing. You should also negotiate the usual exceptions for information that:

• is publicly available without any breach of your obligations;
• you can demonstrate you already knew before it was disclosed;
• you lawfully obtained from an independent third party;
• you developed independently, without using the protected materials.

The permitted purpose of use also matters. The wording should allow you to assess the legal, financial and operational aspects of the offer and arrange financing. Permission merely to ‘familiarise yourself with the concept’ may create unnecessary disputes over whether you can prepare your own financial model.

Check whether the agreement also protects your information. If you are providing a statement of assets, a business plan or details of your proposed premises, mutual confidentiality provisions make sense. An NDA does not, however, replace obligations relating to the processing of personal data.

Ensure your advisers and lending bank can access the information

You will often need to review the documents with a lawyer, accountant, tax adviser or bank. Do not assume that an adviser’s professional duty of confidentiality automatically gives you contractual permission to share documents with them. Permitted recipients should be expressly listed or sufficiently clearly defined in the agreement.

In particular, agree:

• which advisers and potential co-investors may receive the information;
• whether you may share it with a bank without further consent from the brand;
• what confidentiality obligations recipients must be bound by;
• the extent to which you are liable for their actions;
• how to proceed if you are legally required to disclose information to a court or public authority.

A practical approach is to give each recipient access only to the information needed for their task. Your lawyer may need the full draft agreement, while the bank will primarily need financial information and details of the proposed contractual commitments. Agree how the information will be shared too: for example, through secure file storage rather than freely circulating email attachments.

Watch out for any requirement to obtain separate consent for each individual employee of a bank or advisory firm. This can delay due diligence. A pre-agreed group of recipients with clear access conditions is a better approach.

Check what happens when negotiations end — and look for hidden commitments

The agreement should distinguish between the negotiation period and the duration of the confidentiality obligations. Long-term protection may be justified for genuinely sensitive know-how. However, if all information is to be protected for the same length of time without distinction, ask why. Statutory protection for certain information may also continue independently of the agreed term.

Set out how documents will be returned and deleted if you decline the offer. An absolute requirement to delete every copy may be difficult to meet because of automatic backups or an adviser’s mandatory record-retention duties. Negotiate limited exceptions, a prohibition on further use and continued confidentiality for any retained copies. Also consider whether you should be allowed to retain materials needed to defend your rights.

Review contractual penalties and how they interact with claims for damages. Check whether a penalty can accumulate for each document, recipient or day. Do not assume that a court will automatically resolve any disproportionate claim later.

Finally, check whether the document also contains a ban on negotiating with other brands, an obligation to buy the franchise or acceptance of another agreement. These commitments go beyond confidentiality and warrant separate assessment.

Practical takeaway: Sign only when you know what is confidential, who may help you assess the offer and how you will deal with the documents if you decide not to proceed.